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Financial Intermediaries Paper

472 words - 2 pages

Financial intermediaries have traditionally played a pivotal role in the growth of the economic sector. The creation of money as a means of exchange and a beneficial way for people to trade their assets, and more importantly to take advantage of the great monetary value attached to them has caused the appearance of specific institutions, markets and individuals that provide the appropriate environment to perform these activities.Financial intermediary refers to an institution, firm or individual who performs intermediation between two or more parties. These institutions assist the channeling of funds between lenders and borrowers. These institutions are engaged in bringing the two parties together by ...view middle of the document...

In this way, they turn "risky assets into safer ones for the benefit of investors and for theirs as well as they gain profits on the difference between the returns and the payments they make." (Morawski, 2007)Another important reason why financial intermediaries have such a significant role is because of the inequality of information available between parties. "The terms of the transactions being held between parties are mutually satisfying and therefore, jeopardize the solidity of market conditions. Allegedly, financial intermediaries are able to lessen these problems." (Morawski, 2007) The institutions involvement in the intermediation process enables them to examine risks and monitor the use of the loans that are provided.The Federal Reserve is the governing agency that controls the amount of money in our economy. The Federal Reserve incorporates 12 Federal Reserve branch banks and all national banks and state charted commercial banks. Banks are businesses that provide financial services for profit. Banks will then borrow money from the Federal Reserve and then charge their lenders a higher interest rate.It is evident that financial intermediaries play a key role in improving the performance of the economy and are therefore successful elements of the financial system. The Federal Reserve, banks and intermediaries embody a mixture of specific elements that are brought together with the purpose of controlling the huge amount of assets available and the income that is generated by them.Reference: Morawski, A. (2007) Financial Intermediaries and the Increased Need forRegulation of Financial Markets. Retrieved January 19, 2007

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